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Do any of these scenarios sound familiar?
Last year when you pulled out the $ 10,000 from your 401(k) plan (intending to pay it back over the next 3 years) your first born was heading off for her first year of college as well as you paid a down payment on your Caribbean cruise. Did you ever imagine that by year’s end you would receive a pink slip and now have a $4,000 IRS bill.
You started your small sideline business, hired several workers, but before you paid over to the IRS your payroll withholding taxes, you realized that your business concept was not going to work. You decided to clear your debts with the bank, cell phone company, and some of your credit cards — darn those payroll taxes. Now you received an assessment notice from the IRS stating that they intend to levy on ALL of your assets.
You had an IRS audit and ended up owing two years of adjustments that started off at $ 3,500 but now you owe $ 10,200 because you were assessed negligence penalties and interest.
The purpose of this article is two fold: to address some common mistakes people make when dealing with their IRS bill and provide some quick options. Remember, when dealing with the IRS, you want to deal with an advisor who is well seasoned in handling these types of problems if you can not resolved them yourself.
7 Common Mistakes
1. LACK OF CONTACT – The first phase of the collection process after the taxes have been assessed is for the Internal Revenue Service (IRS) to send a notice requesting payment of the taxes in full. Upon receiving the first notice, you should determine if the bill is correct. If the bill is correct, CONTACT the IRS to review your possible options for satisfying the debt. If the bill is not correct, CONTACT the IRS so you can start gathering documents and records to show them why the bill is not correct. Either way, CONTACT should be your first step since failing to contact the IRS may give the wrong signal and cause you to waive many of your rights. Doing nothing will not make the problem disappear and the collection process will continue even without your participation.
Take the case of a gentleman who had a tax bill for one year that was being collected by a continuous wage levy and just received another notice for another year. While at the local IRS office trying to see what the new notice was about, he learned that a dependent exemption deduction had been disallowed and all he needed to do was get the proper documentation showing he was entitled to claim the dependent, and the matter would be corrected. The levy would be released, the new tax bill would be abated, and a refund of the payments would be made. By continuing to do nothing, he would still be facing the devastating effects of having his wages garnished to pay a bill he really didn’t owe.
2. BAD ATTITUDE – When talking to the representatives from the IRS, keep emotion and personal feeling out of the picture. The person that you would be talking to represents the government and has a job to do for the government (IRS). Getting angry, emotional and adding personal feelings to the discussion won’t change the facts or figures. Actually, it can only make matters worse since it may show a lack of willingness to cooperate and deal with the issues and will certainly add to your frustration. Remember that Revenue Officers are people too and they have the power, to affect the outcome of this situation, you don’t.
Take the case of the business owner who had contracts with the Department of Education. The business purchased the communications equipment, installed it, and was paid later than expected. Business taxes became past due and he faced possible enforced collection. During his contact with the IRS, he tried to make it seem as if it was the governments fault that he is unable to pay his tax bill and allowed personal feelings and emotion guide the conversation. Frustration set in and he basically refused acceptance of advice from the IRS about what options there were.
3. NO GAME PLAN – Whether the contact with the IRS is initiated by you or from a telephone call from one of the collection service centers, the GAME PLAN must be planned, recognized and developed. From the IRS side of the matter, they are trained to have the GAME PLAN developed at the initial contact stage. “Their” GAME PLAN is to collect as much as possible in the shortest amount of time with the least amount of cost to the government. You would be surprised by how pleasantly the IRS representative sounds as they put “their” terms of the GAME PLAN on the table for you to accept. By recognizing “their” GAME PLAN, and having developed an alternate plan, you keep yourself from blindly agreeing to terms and conditions that are not compatible with your personal and financial circumstances. Too often taxpayers don’t have an alternate plan and take an approach of submission out of fear, taking the first option that is offered by IRS as their alternative.
Take the case of the city employee who had received a certified mail “final notice of intent to levy”. He had already made a repayment arrangement with the state for some past due taxes on their terms and thought he would make arrangements to pay the federal taxes also. Upon contacting the IRS service center to discuss a repayment arrangement, they proposed that he pay a specified amount or the case would have to be sent to the local office for collection. Being unsure of what would happen if the case was handled at the local office, the gentleman accepted the proposed monthly payment plan and miserably wondered how he would keep the plan. He may have been able to get a lower monthly payment amount and a longer time if the case were handled at his local office, but not having an alternate plan to propose and operating out of fear he made a decision.
4. NOT UNDERSTANDING YOUR RIGHTS – The Internal Revenue Service Restructuring and Reform Act of 1998 (RRA 98) is legislation that expanded the rights of taxpayers when dealing with the Internal Revenue Service. This expansion of rights granted taxpayers Due Process appeal rights to have a hearing to appeal certain collection actions starting at the local level. The law created the Collection Due Process (CDP) appeal process as well as the Collection Appeals Program (CAP). These two procedures provide very important rights to taxpayers and allow them the opportunity to be heard during various phases of the collection process and challenge certain collection decisions. Lawmakers saw the need and importance of having an independent review process, where another department of the agency looks at the facts and issues without the perceived influential intervention of the caseworker and superiors. By not understanding these rights and when to use them, the valuable opportunity of having a “neutral” party consider your circumstances and maybe granting a more favorable result is lost. The way to PROTECT YOUR RIGHTS to appeal collection actions is to be sure not to waive these newly created rights. If the appeal request is not timely raised, it is permanently waived and IRS can legally proceed to take enforcement actions to collect the tax debt.
Take the case of the couple going through divorce that has a joint tax bill for prior years and are now facing having a notice of federal tax lien filed against their assets. Since they both have to re-establish their personal and financial lives, the tax lien would have a crippling effect on their credit history. Once they understood the process for having an independent “neutral” party review their case and rationale for having the tax lien withheld, they timely initiated the process. The outcome was a favorable result they would agree to, the lien would not be filed while they performed certain conditions of their installment agreement.
5. FAILURE TO UNDERSTAND THE REAL PROBLEM– This process requires the taxpayer to step back and take an honest look at their past, present, and future situation. When trying to commit to a permanent solution to the tax problem, understanding the cause is crucial. After the cause has been recognized, looking at the future will help develop the proper cure. There are many instances where taxpayers refuse to look at themselves or their financial choices as the cause of the problem. Developing and implementing a realistic workable plan requires knowing the cause and your capabilities in the future. The idea of taking steps to remove the anxiety of immediate collections by agreeing to a plan now without consideration for the future compliance issues is a prime example of circular logic, you end up right back where you started.
Take the case of a business owner I had worked with to solve her payroll tax liability and the steps it took to get her to realize and accept that operating practices was a major cause of the tax and financial problems. This business owner was facing a decrease in sales but continued to keep the same level of staffing she had when business was good and continued to purchase newer model vehicles for herself and the company. There are two adjustments the business owner had to deal with. The first was having to let long time employees (friends) go to reduce staffing costs and not let it be a personal issue to improve the company bottom line, keep focus on the business purpose. The other adjustment that the owner had to make was to realize that the new vehicle impression she was making to “the world”, really wouldn’t matter after the business failed and she was unemployed.
6. UNREALISTIC AGREEMENT – Owing the IRS and now having them on the list with your other creditors to be paid regularly takes a serious COMMITMENT. The IRS is in a quite different position than the typical creditors that you have. Basically, IRS became a creditor through the nonconsensual contractual relationship that developed. There was no negotiation about the IRS allowing you to use the funds or what the repayment terms would be. After the taxpayer and the IRS have agreed upon a plan, the terms and conditions are binding on both parties and control the consequences until the plan is completed. Therefore, COMMITMENT to the tax repayment plan is very important. Once the plan is started, failing to keep up your end of the bargain by not meeting the terms timely will be dealt with by IRS keeping their COMMITMENT to use all the means available to collect the debt by lien, levy, or asset seizure
Take the case of the grading contractor who had some business tax difficulties, and wanted to take the aggressive approach to “getting that IRS bill paid off” to save on penalties and interest. They had contracts pending for jobs to start very soon and agreed to make pretty large payments. As fate would have it, the start time for the jobs kept getting pushed back further and further, they encountered an unusually cold and wet winter, and struggled to try to make the large payments they thought would help them save on interest and penalties. Eventually the business defaulted on their plan and faced a bank levy, which may have been prevented with a more careful financial evaluation.
7. NOT KNOWING WHEN TO FOLD/SHUT DOWN – Some circumstances require you to take a hard look at such drastic steps as bankruptcy, shutting down your business, seeking or accepting a new job, etc. If you lack the knowledge about budgeting, income enhancement ideas, money saving tax strategies, you might also fail to recognize when it’s time to change the direction of your business and/or your professional life. Sometimes one of the hardest decisions a business owner must make is the decision to bring their entrepreneurial dream to an end. It takes a business owner who is operating on facts and figures and a clear understanding of the market they serve, not optimism to recognize that closing or even filing for bankruptcy protection is a good solution to overcome a drastic financial event.
Take the case of a delivery company that owed a substantial amount for past due payroll taxes, lost his largest account and began on the road to financial decline. When the owner took a realistic look at all the financial issues they faced, the decision was made to shut the business down. By understanding the challenges the business would have to face if they tried to continue operating, the owner was able to orderly shut down before facing a disruptive IRS forced shut down.
There are numerous options available when faced with an IRS bill. Again, you should first determine if the bill is accurate, assess your personal and business situation and become fully knowledgeable about various collection options available. Whether it is an offer in compromise, an installment agreement, financial restructuring, or having collection suspended due to hardship, by avoiding some of the common mistakes and seeking professional assistance when needed, you can still get a permanent solution when dealing with your tax problems.
